If you frequent budgeting sites and threads online you have probably seen this 50/30/20 budget rule mentioned as it is one of the most commonly used. It was popularized by United States senator of Massachusetts Elizabeth Warren and her daughter Amelia Warren, in her bestselling book All Your Worth: The Ultimate Lifetime Money Plan.
This method involves dividing your after tax income into three parts; 50% on needs, 30% on wants and 20% on savings. Going this route can be done intuitively because the money is easily allocated.
50% on needs
The needs involve bills and purchases that sustain you such as rent, food and utilities. Car payments, health insurance, housing and meals cannot be pushed aside for any reason as they keep you alive and able to work. However, if your needs cannot be covered by the allocated percentage, you should consider downsizing your lifestyle so that you can live within your means.
30% on wants
Wants are non-essentials that you choose to indulge in such as hobbies, vacations and entertainment subscriptions. This does not mean reckless splurging; you still have to be careful when choosing what to indulge in.
20% on savings
The last percentage goes toward your future. It can be used to
- Pay off debts
- Build and emergency fund
- Savings such as retirement and buying a house.
Process of creating a 50/30/20 budget
Spending daily is a common thing and more often than not you end up using more than what you intended to use. Have a simple budgeting method will give you structure, stability and safety.
These are the steps you have to take to create the 50/30/20 budget
Collect your income
With this step you have to look at how much money you get from your sources such as your 9-5 job and your investments. This is important as you will have a clear picture of how much money you have to spend and create a budget around it.
Pull out the budget
This is the part where you have to start dividing your income. You can multiply the income by 0.5, 0.3 and 0.2 respectively to get the amount you need for each group. Once you have completed this step you can pull out your budget for the month and start allocating funds where needed.
Now that the bills are paid and other needs are met, you still have to keep track to adjust when needed. It will also keep you in check with your spending so that you don’t go beyond what was set.
Pros and cons of 50/30/20 budget
This budgeting method is referred to as the rule of thumb due to its ease and simplicity when using it. It is ageless as it is clear on what is needed and favorable for beginners. More often than not budgeting is a long and arduous task but using this method your money is easily divided into three.
Having a budget improves your financial awareness on your expenditure. You often pay out of pocket which is fine but gives you a chance to spend way more than you planned to. It’s even worse with cards. Having a budget makes you learn what your bad habits are and you find ways to deal with them before they cause more problems.
In our minds the word budget is synonymous with a restriction which is not the case. Certain words have been given negative connotations to myths they have heard. The 50/30/20 budget is not restrictive; instead it offers a huge percentage of spending money that can award you luxuries now and savings for more after a few years.
With this budgeting method you find that you spend more than the required amount in each category. An example is that your needs surpass the set percentage or that your wants cost you more than planned. In both cases you have to adjust your lifestyle to match your pocket. You can down size or look for a cheaper place to rent and you can limit the number of trips you take.
Unlike other budgets that prioritize your future while forgetting your current life; the 50/30/20 budget gives you a sizable percentage that goes towards having fun and spending without tracking each coin all the time. This freedom is one that draws many to it as you get 30% of your income to do as you please with it.
A huge reason for creating a budget is to pay off debts you have. It could be student loans, car loans or a medical debt that has been hanging over your shoulder while ruining your credit score. This budget sets a stipulated percentage that goes towards becoming debt free.
When you are young you never think that in a few years you will be retired and too old to work your regular fast paced job. This budget reminds you of that and gives you an automatic way to pay for it. It saves you stress and frustration where you have to work until your last breath to make ends meet.
Disaster strikes when you least expect and it could cost you a hefty penny. Having an emergency fund set up gives you shelter when the rainy day hits and you don’t have to be homeless after losing your job or be unable to pay for medical needs. A 50/30/20 budget sets this up for you without having to drain your bank in the moment.
This budgeting method focuses on money distributed in a fixed manner. Circumstances are always changing which can make it harder to set 50% for your needs. Your rent could be increased which will need further adjustments to your budget or any other emergency.
The 50/30/20 budget prioritizes spending more than saving which can be a challenge when you have debts to repay. 20% that goes towards saving is not enough for future investments, emergencies and debt repayment especially if you have a low income.